Web Solutions, Inc.

ISP Business Plan

Market Analysis Summary

The topics which follow discuss our customers, our competitors, and conditions within our industry. The Market Analysis data found in the following table and chart is taken from the 1997 U.S. Census.

4.1 Market Segmentation

The company's customer base includes all consumers and all small- to medium-sized businesses, including start-ups. The company plans to concentrate on SOHO clients, as these are perfect targets for our new high-speed offerings, and hold the greatest growth potential for the company. Web Solutions feels that these market segments have special pricing and service needs, and make more dedicated, reliable customers.

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4.2 Service Business Analysis

The following sub-topics look at the size and concentration of businesses in this group, the way services are bought and sold, and specific competitors.

4.2.1 Competition and Buying Patterns

Web Solutions believes that its customers choose its products and services based on the following criteria:

Price.

Experience.

Reputation.

Service.

Accessibility.

4.2.2 Main Competitors

Competitive threats come from other ISPs, including the following companies: Jump.Net, Arizona.Net, AOL, EarthLink, Mindspring, and Prodigy Internet. Most of our competitors offer solutions for Windows, and perhaps Mac, but ignore all other operating systems. With the rise of Linux and other alternative operating systems, there is potential for Web Solutions to surpass its competitors.

Key competitors are detailed as follows:

Jump.NetJump.Net offers a wide variety of services to match customer needs. They have split information into two categories:

Basic service: for customers looking for a simple, inexpensive way to connect their home or business to the Internet.

Complete details: for customers who need a custom solution for unique requirements, Jump.net offers the following services:

Connectivity:

ADSL & SDSL.

Modem service.

ISDN.

Nationwide access.

Special Services:

Functionalities.

FTP services.

Hardware sales.

Leased lines.

Telnet-only service.

Web hosting.

Arizona.NetArizona.Net is San Antonio's first and largest ISP. Locally owned and operated since 1994, Arizona.Net specializes in modem dial-up, ISDN, dedicated local area network (LAN) access and T1 (a high-speed network link that transmits data at 1.5 Mbps) to the Internet. Arizona.Net now serves Phoenix, San Antonio, Houston, Dallas, Spring, Georgetown, Dripping Springs, Bandera, New Braunfels, and Boerne.

For dialup connections, Arizona.Net uses an all-digital modem pool consisting of equipment from US Robotics, Ascend, and Livingston. All of their locations maintain a full 56k modem pool, upgraded to the latest version of the v.90 standard. These digital modems allow for a more reliable connection, and enable them to make ISDN connections on the same equipment, so they can offer 64k ISDN service with all dialup accounts. To make sure that customers can get to their services, Arizona.Net maintains a no-busy-signal policy.

If customers report a busy signal, Arizona.Net has the ability to connect as many telephone lines as necessary to relieve the problem. Currently, none of their locations are having any problems with busy signals. Arizona.Net maintains multiple separate T3 (a high-speed network link that transmits data at 45 Mpbs) connections to the Internet backbone through multiple backbone providers. These separate connections give Arizona.Net more than enough bandwidth to handle future growth as well as provide the security of uninterrupted service.

EarthLinkEarthLink helps its members have an enjoyable and productive Internet experience by providing reliable, unlimited Internet access and Web hosting services, outstanding technical support, useful information, and innovative services. Prices are among the lowest in the industry. EarthLink offers the following services:

Internet access.

High-speed access.

Web hosting.

EarthLink Sprint bundle.

MindspringMindSpring Biz delivers complete Business Internet Solutions for any small business backed with its award winning service and support. Its business plans--whether Web Hosting, e-commerce, high speed dedicated access, or Web Design--are packaged to fit customer needs today and are tailored to grow along with business for tomorrow. Mindspring offers the following business solutions:

Web hosting.

Business access.

E-commerce.

Domain reservation.

Dedicated access.

MindSpring dialup access.

SDSL Waiting Lis.

Promotional solutions.

Help desk.

4.2.3 Risks

The company recognizes that it is subject to both market and industry risks. The company's view of its risks, as well as how each is being addressed, is as follows:

Regulations. Possible problems caused by a sudden increase in regulation by local, State, or Federal authorities. One way the company can reduce this risk is to diversify into several different, but related, business areas. If one area becomes too heavily regulated it may be sold and the profit rolled back into the company to bolster the remaining business or start a new venture.

Monopolistic pricing. Aggressive or monopolistic pricing by large or heavily-funded providers. By holding prices down, it becomes difficult for competitors to "low-ball" the company. By diversifying, we can protect business in one area by bundling it with offerings from another area, meeting the needs of the customers and strengthening their ties to the company.

Legal matters. Lawsuits stemming from user abuse or accessibility of pornographic or questionable materials. The courts have historically classified ISP's as "carriers" unless the ISP made an incomplete effort to actively filter material posted by or made available to its users. The company's usage policy clearly states that illegal behavior will result in termination of service, but we do not otherwise attempt to control the access of its users or their content, thus maintaining the company's stance as a "carrier" in the eyes of the law. If the legal environment should change, the company will modify its policies and procedures to conform to the prevailing legal environment.

Technology. Sudden and unexpected shifts in technology or the popularity of the Internet. The company will maintain an active research and development effort, as well as ongoing review of forthcoming technologies from competitors and vendors, in order to stay near the top of the technological curve. Also, the diversification of the company's business allows it to respond to shifts in revenue by redistributing material and personnel into those efforts most likely to generate the highest return on investment.

4.2.4 Business Participants

The company is competing in the low-cost Internet access and website hosting niche of the industry. The industry is moving in the direction of a fusion of VVD services over a single common media (ref. The AOL-Time/Warner merger). This is where all media players must move in order to compete in the coming decade.

The alternative is to be a content provider. This is a less desirable position as it leaves the company too much at the whim of the public and forces the company to renew its efforts continuously to provide usable content.

The ISP industry has begun the process of specialization. Many companies who began by filling all needs (as we do today) have moved into areas which utilize their strengths. These specializations include:

Functionalities ("Server Hotel") facilities.

Web hosting.

Dialup access.

Content provision.

Additionally, there are a few new markets emerging, such as Applications Service Providers.

Access services ISPs offer a way for people to enter the Internet. According to IDC, America Online (including subscribers to CompuServe, which AOL acquired in September, 1997), has approximately a 43% share of the total subscribers in the ISP segment, followed by Microsoft's MSN, and AT&T Corporation's WorldNet. After these major players, roughly 5,000 ISPs fight over the remainder of the market. IDC estimates that the consumer ISP market will expand from $10.7 billion in 1998 to $37 billion in 2003. When users access the Internet, they dial into the local point of presence (POP) of an ISP or online service provider (OSP). ISPs offer basic, flat-rate Internet access to customers, either through their own networks, or through networks leased from other ISPs. Users dial into an ISP's network through ordinary phone lines and, using a browser, access the Web. OSPs, such as America Online, provide original content in areas such as shopping, news groups, gaming groups, investor information, and magazines.Access fees for both ISPs and OSPs typically range from $19.95 to $21.95 per month for unlimited Internet use. The flat rate system was pioneered by America Online in 1996 and has led to an explosion of subscribers. Flat rates have also served to increase the amount of time that users spend online, which has forced many local telephone service companies to upgrade capacity in order to accommodate the heavy usage.

A taxing issue One nettlesome issue that could potentially slow the growth of e-commerce is the taxation of goods and services. Currently, fees paid to ISPs and OSPs are tax-free, except in a few states. Purchases, however, are subject to the same taxes that apply to goods sold in a store or catalog. When online purchases are made, purchasers are technically responsible for remitting state and local taxes. The only exception occurs when a consumer buys from a corporation with a physical presence in that consumer's home state. In actuality, however, online shoppers rarely pay this cyber-taxation.While state and local governments are disturbed at this loss of revenue--and the potential loss of immense future revenue--federal governmental officials have adopted a hands-off policy with regard to Internet taxation. In October, 1998, the Internet Tax Freedom Act was passed, placing a three-year ban on any new Internet sales taxes or taxes on ISPs. During this three-year time frame, a committee of government and business representatives known as The Advisory Commission on Electronic Commerce will meet to discuss a more permanent tax policy. The 19 members of the commission include three federal officials, eight business and consumer leaders, and eight representatives of state and local governments.

ISPs face challenges The rise in Internet users has proven to be a boon for Internet service providers, which charge monthly subscription fees in return for providing access. While business has been good for many of these ISPs, a number of challenges threaten the long-term growth and profitability of these companies.

Broad access becomes more prevalent Today, most residential Internet users gain access to the Web via commonplace copper telephone wires. Download speeds are limited to a maximum 56 Kbps and are often significantly slower than that, resulting in frustration among impatient Web surfers. The lack of speed has provided an opportunity for broadband service providers to gain market share. LLC's RoadRunner, which provides high-speed online access, has begun to attract users who desire more speed and are willing to pay a higher price. As of the second quarter of 1999, cable modem users numbered over 1 million, still a small percentage of total Internet users, but growing very rapidly.

"Free" Internet access proves viable While most headlines or advertisements proclaiming free Internet service are actually a bit misleading, the impact of this business model is starting to be felt. The most prominent and successful example of a free ISP is in the United Kingdom, where Freeserve plc does not charge its customers access fees. Unlike the United States, however, local calls in the United Kingdom are billed on a per-minute basis, so heavy Internet users may actually pay more than in the United States.In the United States, different types of "free" plans are being marketed. One strategy gives a subscriber free service in exchange for having advertisements scroll constantly across his or her PC screen. A different slant to this marketing scheme allows a consumer to earn a free personal computer, provided that he or she signs up for a few years of Internet service in advance.

The following is a list of services which various websites provide:

Destinations. Destinations are places, or websites, located on the Internet where people can go for information, entertainment, or commerce.

Content providers. This type of website offers mostly original content (like news articles) to subscribers. Some of the major content providers include ESPN Sports Zone (a joint venture between Infoseek Corp. and Walt Disney Co.), SportsLine USA Inc., privately held The Motley Fool Inc., and MSNBC (a joint venture between Microsoft and NBC). With new websites being established every day, it's difficult to come up with a reasonable estimate for the size of this market.

Portals. These websites tend to gather content into one place rather than creating it themselves. Some of the major portals include Yahoo! Inc. (1998 sales of $206 million), Infoseek Corporation ($63 million in fiscal year 1998), and Lycos Inc. ($56 million in fiscal year 1998). Although e-commerce has started to become a larger promotion of these companies' business, portals typically rely on the sale of advertising space to generate revenue. According to Jupiter Communications, a market research firm based in New York City, advertisers spent approximately $2 billion for online ads in 1998. Jupiter believes that this number will hit $9 billion in 2002.

Communities. Communities are similar to portals, in that their primary revenue streams come from advertisers. Some of the major community sites include Geocities (1998 sales of $18.4 million), now a part of Yahoo! Xoom.com Inc. ($8.3 million), and theglobe.com Inc. ($5.5 million).

Business-to-consumer e-commerce. Estimates for the amount of online spending by consumers in 1998 range from $7 billion to $13 billion, with at least 25% occurring during the Christmas shopping season. Forrester Research, an information technology research firm in Cambridge, Massachusetts, believes that online retail spending will hit $108 billion in 2003. Some of the major publicly traded online retailers included Amazon.com Inc. (1998 sales of $610 million), CDnow Inc. ($98 million), barnesandnoble. com Inc. ($62 million), and Beyond.com corp. ($37 million). A variety of "real-world" companies including Gap Inc., Lands' End Inc., and Macy's have established retail operations on the Internet.

Business-to-business e-commerce. Although there are very few pure business-to-business e-commerce firms, this segment dwarfs the business-to-consumer sector. Forrester believes that this market, which totaled $43 billion in 1998, should rise to $1.3 trillion by 2003. Most companies in this category, like Cisco Systems and Dell Computer Corporation, have other sales channels, but are increasingly using the Internet to lower costs and reach a wider customer base. Dell generates an estimated $30 million in sales every day via the Internet, while Cisco estimates that it produces approximately $33 million a day in sales through the Internet.

Auctions. The online market for auctions is headed by eBay Inc., (1998 revenues of $86.1 million, with $745 million of gross merchandise sales).

Hardware: networking equipment. The hardware sector provides the infrastructure on which the Internet is built. Hardware companies provide the equipment that forms the interconnections between the networks that comprise the Internet. Their products steer traffic through a spiderweb of routes to the correct destination. One critical piece of networking equipment is the router, which acts as a traffic officer by directing data to the proper destination. Another key element of the Internet infrastructure is a remote access concentrator. Access concentrators link employees and customers to an organization's internal network, and link consumers to the Internet via their ISP.